Derivative credit limit (PFE)

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

A derivative credit limit, often called a pre-settlement or PFE line, is the credit a bank approves to cover a client's swaps and forward contracts. It is measured not in the face value of the hedges but in potential future exposure: what the client could come to owe the bank if rates or currencies moved against it before the contracts end, estimated as a share of face value that rises with term and volatility, plus anything already owed. In a fictional case, a bank applying a 10% factor counts US$20m of one-year forwards as US$2m against the line; hedging further ahead uses the line faster.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.